General Counsel Face ESG Headwinds

At the September 2022 Harvard-wide conference “Reimagining the Role of Business in the Public Square,” Brad Smith, vice chair and president of Microsoft, highlighted one of the most difficult tasks of operating in today’s shifting corporate landscape: “One of the things about being a business—certainly one of the things about trying to lead a business—is that decisions need to be made.” He continued: “All of us who are in business will need to decide, what is the mission of our company? How do we fulfill our broader commitments? How do we synthesize these different needs? And how do we do it in a way that makes sustainable tangible progress?”

Smith’s comments reflect a growing—albeit increasingly controversial—trend within business to better address the obligations they arguably owe to all their stakeholders: employees, suppliers, communities in which they operate, society at large, and even the planet. And not just shareholders. Concerns over environmental, social, and governance (ESG) issues offer one particularly salient case study of this dynamic.

Given the role business is seen as playing in society, these debates are resonating across the public sphere. Indeed, the Edelman Trust Barometer, an annual survey that seeks to document “trust” throughout society, declared that “societal leadership is now a core function of business” in its 2022 findings.

Eighty-one percent of those surveyed said, “CEOs should be personally visible when discussing public policy with external stakeholders or work their company has done to benefit society,” and 60 percent (a 5 percent increase in three years) said they “expect the CEO to speak publicly about controversial social and political issues” when they are looking at their own employment options. In one statistic, the Trust Barometer revealed the public had more faith in business over government to be the face of change. “Nearly 6 in 10 [individuals] want business to add geopolitical issues to its agenda,” the report said. As geopolitical issues, including a war in Ukraine and a global recession, unsettle the world, John Coates, the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School, has previously said that business—and law firms—need to become increasingly agile at decision-making.

GCs, unto the breach!

As businesses are increasingly expected to make their voice heard on social issues—or face reputational damage—and ESG compliance demands grow, legal teams have become vital advisers, with general counsel at the center of the firestorm. As we have previously documented in The Practice, GCs specifically and legal more generally are one of the few functions that have a company-wide vantage point. That is perhaps why GCs like Smith are increasingly being elevated to higher-level functions that often include an explicit ESG mandate. Indeed, data suggests GCs and their teams are being charged with ESG duties. For instance, the 2022 Association of Corporate Counsel study of chief legal officers found that one in four GCs formally oversees ESG/CSR (corporate social responsibility) functions, up from just 15 percent two years ago. The same study found that over 80 percent of GCs oversee compliance, nearly 50 percent ethics, 40 percent risk, and nearly 20 percent public affairs—all functions that have direct and substantial ESG implications in their own right.

A 2022 EY Law–Harvard Law School Center on the Legal Profession study (see “The 2022 Sustainability Study” below) found that two-thirds of those surveyed thought that their organization’s focus on ESG issues will increase in the future—up 52 percent from 2020—with 99 percent of GCs noting that they expected their sustainability work specifically to increase over the next three years. Moreover, more than 40 percent thought that environmental and employee safety work would increase by more than 10 percent, and a quarter diversity and inclusion would increase. Similarly, a recent study from Corporate Counsel and Morrison & Foerster found that 90 percent of the 79 in-house lawyer participants were steering their companies’ ESG efforts.

Moreover, because ESG issues are increasingly emerging though regulation and litigation, legal departments are well placed to play a central role. This is particularly true in Europe, where the European Green Deal as well as European Union directives on emissions trading, board diversity, and reporting are increasingly powerful. But it is also occurring in the United States, where SEC climate rules may signal an emerging hard-law ESG watershed.

Finally, ESG is increasingly playing out through soft-law and norm setting. The Russian attack on Ukraine, the pandemic, and increased attention toward police violence in the United States have instigated a more vigilant public, with employees asking corporate policy to speak to workplace safety, social issues, environmental pledges, and diversity and inclusion targets more diligently, and to make other commitments that go beyond formal legal standards. While this presents challenges for organizations, broadly, legal departments are increasingly worried about these risks, especially with regards to reputational damage (see figure 2 below).

As Benjamin W. Heineman, Jr., former GC for General Electric, has passionately argued, these ambiguous issues compel the GC to act as a lawyer-statesman, whose fundamental mission is to merge “high performance with high integrity.” Heineman explains:

[T]he fusion of high performance with high integrity is not just about risk mitigation. It is about creating affirmative benefits in the company, in the marketplace and in the broader global society. Ultimately, high performance with high integrity creates the fundamental trust among shareholders, creditors, employees, recruits, customers, suppliers, regulators, communities, the media and the general public.

Emerging duties, new challenges

While GCs and their legal departments are increasingly charged with addressing ESG, challenges remain. For instance, the 2022 Sustainability Study found that while virtually all GCs expected sustainability workloads to increase over the next three years, almost all reported that they have neither the required funds nor the existing internal legal expertise to support their organization’s sustainability initiatives. This will be an ongoing challenge. Indeed, the 2021 EY–CLP Survey found that 88 percent of GCs were planning to reduce the cost of the legal function over the next three years, with 50 percent saying those reductions will be 20 percent or more.

This has led companies to develop different strategies to cope, including sourcing talent through hiring or reallocating, increasing the use of technology and process management, and mixing up the use of internal resources and outside legal expertise or alternative legal service providers. Nabeel A. Al Mansour, executive vice president and general counsel of Saudi Aramco, met the complex ESG landscape with “an agile ecosystem of unique multidisciplinary capabilities.” He said:

Internally, we have hired subject-matter experts to advise the company on these issues as well as develop our own resources organically. We have also developed strong ties with select external law firms who have deep knowledge in areas that complement our in-house expertise. On top of that, we continued to foster strong relationships with our internal clients and act as true partners in responding to these ever-evolving issues.

While GCs and in-house teams are in agreement that their workload is increasing, they are less clear about the exact nature of the work. According to the Sustainability Study, 92 percent of law departments reported challenges creating policies around social issues and 90 percent in environmental issues when formal regulator frameworks were either lacking or unclear. “The key to managing ambiguity,” said Horacio Gutierrez, senior executive vice president, general counsel, and secretary at The Walt Disney Company, one of several chief legal officers interviewed for the study, “is to consider the question at scale.” He went on,

Decisions in the ESG space cannot be made on an ad hoc basis. They must be made with the understanding that the organization is going to face similar questions again. As such, you have to understand the underlying issues at play. You also need to have a clear understanding of the organization’s values to guide you through the decision-making process.

The data also suggests a diffused—and possibly complicated—organizational matrix. As Figure 5 illustrates, while a number of law department respondents reported having primary responsibility over some ESG functions—for instance, 29 percent reported being primarily responsible for addressing concerns of ESG-conscious investors—the more general takeaway was that ESG remains a collective endeavor. According to the Sustainability Study, “Complicating the law department’s job in defining its role is the fact that many environmental and social activities are either collectively led or their ownership is split across various functional departments.” That being said, the study also found that 61 percent of GCs reported that they expect to increase collaboration with the business side of their organizations when it comes to addressing sustainability. “The role of the law department in ESG issues is evolving at an incredibly rapid pace,” said Damon Hart, executive vice president and chief legal officer for Liberty Mutual Insurance. “We are constantly reevaluating how involved we need to be and how we partner with different parts of the business.”

What’s next?

There is little doubt that GCs—and their teams—are being tasked by leadership to help their organizations navigate through an evolving ESG landscape. Law departments are having to expand what they do—and how they do it. While law departments see the need to manage ESG challenges, they are also virtually unanimous in the knowledge that they do not have the internal resources—in terms of either budget or dedicated expertise—to do so adequately. As the 2022 Sustainability Study concluded, “While General Counsel are well positioned to be a key voice on sustainability, they will have to build capacity, form partnerships, and set the goals, guidelines, and governance frameworks that will provide the foundation for their organizations’ ESG and business futures. The stakes are high as organizations define what role the law department is—and should be—playing in this process.”